Chapter 2 - Basic cost management concepts. After completing this chapter, you should be able to: Explain what is meant by the word cost; distinguish among product costs, period costs, and expenses; describe the role of costs in published financial statements.
Trang 1Basic Cost Management ConceptsChapter 2
Trang 2What Do We Mean By a Cost?
A cost
is the measure of resources given
up to achieve a particular purpose.
Trang 3Product Costs, Period Costs, and
Expenses
Product costs are costs associated with goods for
sale until the time period during which the products
are sold, at which time the costs become expenses.
Period costs are costs that are expensed during the
time period in which they are incurred.
Expenses are the consumption of assets for the
purpose of generating revenue.
Trang 4Cost Classifications on Financial
Statements – Income Statement
Product Costs
Cost of goods sold
Period Costs
Operating expenses
Trang 5Types of Production Processes
Type of Production Description of Example of
Little standardization Unique products
Batch Multiple products Caterpillar
Low volume
Assembly Line A few major products Ford
Higher volume Continuous Flow High volume Exxon
Highly standardized commodity products
Trang 6Manufacturing Costs
The Product
Direct Labor Manufacturing Overhead Direct
Material
Trang 7Direct Material
Example:
Steel used to manufacture the automobile.
Example:
Steel used to manufacture the automobile.
Cost of raw material that is used to
make, and can be conveniently traced, to the finished product.
Trang 8Cost of salaries, wages, and fringe
benefits for personnel who work directly on manufactured products.
Direct Labor
Example:
Wages paid to an automobile assembly
worker.
Example:
Wages paid to an automobile assembly
worker.
Trang 9Manufacturing Overhead
All other manufacturing costs
Materials used to support
the production process
Examples: lubricants and
cleaning supplies used in an
automobile assembly plant.
Indirect Labor
Indirect
Material
Other Costs
Trang 10Comet Computer Corporation Schedule of Cost of Goods Manufactured Raw material used $ 134,980 Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs $ 414,980 Add: Work-in-process inventory, January 1 120 Subtotal $ 415,100 Deduct: Work-in-process inventory, December 31 100 Cost of goods manufactured $ 415,000
Schedule of Cost of Goods
Manufactured
Trang 11Comet Computer Corporation Schedule of Cost of Goods Manufactured
Total manufacturing overhead 230,000 Total manufacturing costs $ 414,980 Add: Work-in-process inventory, January 1 120
Trang 12Comet Computer Corporation Schedule of Cost of Goods Manufactured Raw material used $ 134,980 Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs $ 414,980 Add: Work-in-process inventory, January 1 120 Subtotal $ 415,100 Deduct: Work-in-process inventory, December 31 100 Cost of goods manufactured $ 415,000
Schedule of Cost of Goods
Manufactured
Include all direct labor costs incurred during the
current period.
Trang 13Comet Computer Corporation Schedule of Cost of Goods Manufactured Raw material used $ 134,980 Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs $ 414,980 Add: Work-in-process inventory, January 1 120 Subtotal $ 415,100 Deduct: Work-in-process inventory, December 31 100 Cost of goods manufactured $ 415,000
Computation of Total Manufacturing Overhead Indirect material $ 10,000 Indirect labor 40,000 Depreciation on factory 90,000 Depreciation on equipment 70,000 Utilities 15,000 Insurance 5,000 Total manufacturing overhead $ 230,000
Trang 14Comet Computer Corporation Schedule of Cost of Goods Manufactured Raw material used $ 134,980 Direct labor 50,000 Total manufacturing overhead 230,000 Total manufacturing costs $ 414,980 Add: Work-in-process inventory, January 1 120 Subtotal $ 415,100 Deduct: Work-in-process inventory, December 31 100 Cost of goods manufactured $ 415,000
Schedule of Cost of Goods
Manufactured
Beginning process inventory is carried over from the
work-in-prior period.
Ending work-in-process
inventory contains the cost of
unfinished goods, and is
reported in the current assets
section of the balance sheet.
Trang 15Income Statement for a
Manufacturer
Comet Computer Corporation
Income Statement For the Year Ended December 31, 20X2
Less: Cost of goods sold 415,010
Selling and administrative expenses 174,490
Trang 16Comet Computer Corporation
Income Statement For the Year Ended December 31, 20X2
Less: Cost of goods sold 415,010
Selling and administrative expenses 174,490
Comet Computer Corporation Schedule of Cost of Goods Sold For the Year Ended December 31, 20X2 Finished-goods inventory, Jan 1 $ 200
Add: Cost of goods manufactured 415,000
Cost of goods available for sale 415,200
Deduct Finished-goods inventory, Dec 31 190
Cost of goods sold $ 415,010
Trang 17Activities that cause costs to be incurred are called COST DRIVERS :
Cost Driver Examples
Machining operations Machine hours
Production scheduling Manufacturing orders
Shop order handling Shop orders
Valve assembly support Customer requisitions
Trang 18Cost Classifications
Cost behavior means how a cost will react to changes in the level of business activity.
Total variable costs change when activity changes.
Total fixed costs remain unchanged when activity changes.
Trang 19Cost Classifications
Summary of Variable and Fixed Cost Behavior
Total variable cost changes Variable cost per unit Variable as activity level changes remains the same over
wide ranges of activity.
Trang 20Direct and Indirect Costs
Direct costs
Costs that can be
easily and conveniently
traced to a product or
department.
Example: cost of paint in
the paint department of an
automobile assembly plant.
Indirect costs
Costs that must be allocated in order to be assigned to a product or department
Example: cost of national advertising for an airline is indirect to a particular
flight.
Trang 21Controllable and
Uncontrollable Costs
A cost that can be significantly influenced
by a manager is a controllable cost.
restaurant chain
Trang 22Opportunity Cost
The potential benefit that is
given up when one
alternative is selected over
another.
not attending college,
you could be earning
$30,000 per year
Your opportunity cost
of attending college for one year
is $30,000.
Trang 23Sunk Costs
All costs incurred in the past that cannot be changed
by any decision made now or in the future are sunk
costs Sunk costs should not be considered in
decisions
years ago The $22,000 cost is sunk because whether you drive
it, park it, trade it, or sell it, you cannot change the $22,000
cost.
Trang 24Differential Costs
Costs that differ between alternatives.
Example: You can earn $1,500 per month in your
hometown or $2,000 per month in a nearby city.
Your commuting costs are $50 per month in your
hometown and $300 per month to the city.
What is your differential cost?
$300 - $50 = $250
Trang 25Marginal Costs and Average Costs
The extra cost incurred to produce
one additional unit.
The total cost to produce a quantity divided by the quantity produced.
Marginal and average costs are largely a function of cost behavior
variable and fixed costs.